UK productivity picks up strongly in second half of 2017

LONDON (Reuters) - Britain recorded its strongest productivity growth in more than a decade in the second half of 2017, helped by a strong fourth quarter, but economists said the improvement was unlikely to prove a turning point for one of the economy’s key weak spots.

Productivity growth in most advanced economies has been poor since the 2008 financial crisis and in Britain it has been particularly weak, growing by less than 2 percent in total over the past decade and acting as a major drag on wages.

Friday’s figures from the Office for National Statistics show a marked improvement from the previous trend.

Economic output per hour worked rose by 0.7 percent in the fourth quarter of 2017, above its long-run average though a shade less than first estimated in February.

Third-quarter productivity growth was revised up slightly to 1.0 percent.

Together the two quarters show the strongest growth since the second half of 2005.

However, the gains were largely due to a sharp fall in the number of hours worked - something that proved a temporary phenomenon when it last took place in 2011.

Official forecasters said last month they assumed the improvement seen in preliminary data would not last.

“The sharp improvement in productivity in the second half of 2017 came amid a surprising drop in hours worked over both the third and fourth quarters ... and may have overstated the underlying improvement,” Howard Archer of economic consultancy EY ITEM Club said.

British economic productivity is similar to Canada’s but around 25 percent weaker than in the United States, Germany and France. Economists blame a mix of low business investment, bad management and poor technical skills training for the shortfall.

Damage to the financial sector from the 2008-09 crisis, a fall in North Sea oil production and a big rise in the number of people in relatively low-paid work have also been identified as factors by the Bank of England and academic researchers.

Persistently weak productivity growth is a big reason why the BoE has said it will probably need to raise interest rates over the next few years, despite what it expects to be a sluggish economy as Britain leaves the European Union.

Most economists expect the BoE to raise rates next month for only the second time since the financial crisis.

Friday’s data is unlikely to shift the BoE’s view. The ONS also released figures showing businesses had to spend more on employees for a given amount of output as unemployment remained around its lowest level since the 1970s.

Unit labor costs were 2.1 percent higher than a year earlier in the fourth quarter of 2017, their biggest annual rise since the first three months of the year.

“This matters because it is a hint that domestically generated price pressures are building, which could support the case for further withdrawal of monetary policy accommodation,” said Alan Clarke, an interest rate strategist at Scotiabank.

Reporting by David Milliken; Editing by William Schomberg and Matthew Mpoke Bigg